United States: US, UK, Canada Announce New And Expanded Iran Sanctions Increasing Risks To Persons Conducting Business With Iran

On November 21, the US Government, along with the United Kingdom
and Canada, announced significantly expanded energy-related
sanctions against Iran. In the US, Executive Order 13590 (November 19, 2011),
which authorizes these sanctions, expands upon actions taken
pursuant to the Iran Sanctions Act ("ISA") of 1996 and
the Comprehensive Iran Sanctions, Accountability, and Divestment
Act ("CISADA") of 2010. The new sanctions expand the
scope of sanctions against Iran, present new risks to non-US
persons conducting certain business with Iran's petroleum and
petrochemical industry, and mark the first time the US Department
of the Treasury ("Treasury") has identified the entire
Iranian financial sector as a "primary money laundering
concern" under the USA PATRIOT Act.

Petroleum-based Sanctions

Regarding Iran's petroleum and petrochemical industries, the
new sanctions under EO 13590 specifically target any sale, lease or
provision of goods, services, technology or support that could
directly and significantly:

Contribute to maintenance or enhancement of Iran's ability
to develop domestic petroleum resources, if a single transaction
has a fair market value ("FMV") of $1 million or more, or
if a series of transactions from the same entity have an aggregate
FMV of $5 million or more in a 12-month period.

The monetary thresholds set forth in the EO for triggering
sanctions represent a significant decrease in the thresholds under
CISADA (which are FMV $5 million per single transaction and $20
million in the aggregate for a 12-month period).

"To develop" is defined to mean explore, extract,
refine, or transport by pipeline petroleum resources. This
definition is consistent with previously existing law.

"Petroleum resources" includes petroleum, oil,
natural gas, liquefied natural gas, and refined petroleum products.
This definition is consistent with the definition found in
CISADA.

As is also the case in CISADA, the definition of "Refined
petroleum products" includes diesel, gasoline, jet fuel
(including naphtha-type and kerosene-type jet fuel), and aviation
gasoline.

"Iran" is defined as the Government of Iran and the
territory of Iran and any other territory or marine area, including
the exclusive economic zone and continental shelf, over which the
Government of Iran claims sovereignty, sovereign rights, or
jurisdiction, provided that the Government of Iran exercises
partial or total de facto control over the area or derives a
benefit from economic activity in the area pursuant to
international arrangements. This definition is based largely
on the definition of "Iran" found in the Iranian
Transactions Regulations at 31 CFR Section 560.303, though they do
differ in one potentially significant way. Whereas Section
560.303 says "...derives a benefit from economic activity in
the area pursuant to an international agreement," the new
Executive order says "... pursuant to international
arrangements," which potentially could be read more broadly
than the definition in the existing regulations. This definition
was not previously in CISADA or the Iran Sanctions Act, and raises
the possibility that activities outside of the legal territory of
Iran may be subject to the new sanctions.

Facilitate the maintenance or expansion of Iran's domestic
production of petrochemical products, if a single transaction has a
fair market value of $250,000 or more, or if a series of
transactions from the same entity have an aggregate fair market
value of $1 million or more in a 12-month period.

The monetary thresholds have been lowered from those set forth
in CISADA ($1 million per single transaction and $5 million in the
aggregate).

"Petrochemical products" includes any aromatic,
olefin, and synthesis gas, and any of their derivatives, including
ethylene, propylene, butadiene, benzene, toluene, xylene, ammonia,
methanol, and urea.

The new sanctions apply to (1) any person, entity, or financial
institution that "knowingly" provides the specified
items, (2) a person that owns or controls a person referred to
above, and had actual knowledge or should have known of the latter
engaging in such transactions, and (3) a person that is owned or
controlled by, or under common ownership or control with, a person
referred to above, and "knowingly" participated in the
above activities. The US Department of State has
responsibility for making such a finding. Based on the
knowledge standard articulated in the Executive Order, US companies
potentially could be at risk for the activities of their non-US
affiliates. In addition, because companies may be subject to
successor liability for the acts of others, any company considering
acquiring another entity should implement enhanced due diligence
measures to enable them to undertake an accurate risk
assessment.

Under the Executive Order, any transaction by a US person or
within the United States that evades, avoids, attempts to violate,
or causes a violation of these sanctions is prohibited.

For any entity or person that is found to have engaged in
sanctionable conduct, the US Government can impose one or more of
the following sanctions: (1) prohibit any transactions in foreign
exchange that are subject to US jurisdiction; (2) preclude
involvement in any US Export-Import Bank supported transactions;
(3) deny any licenses required from any US Government agency,
including export and reexport authorizations; (4) preclude
contracting with the US Government; (5) prohibit loans of more than
$10 million from US financial institutions; (6) deny any financial
institution a designation as a primary dealer, or repository of US
Government funds; (7) prohibit transfers of credit or payments
subject to US jurisdiction by, through, or to any financial
institution; (8) block all property or interests in property of the
sanctioned person; and (9) prohibit imports of goods or technology
from the sanctioned person.

Money Laundering

Regarding Iran's financial sector, the Treasury
Department's Financial Crimes Enforcement Network
("FinCEN") has identified Iran as a jurisdiction of
"primary money laundering concern." Under the USA
PATRIOT Act, the Treasury Department has designated the entire
Iranian financial sector – to include Iran's Central
Bank, private Iranian banks, as well as their foreign branches and
subsidiaries – as posing a risk; in particular, entities
doing business with the Iranian financial sector risk violating US
money laundering laws and regulations. In connection with this
designation, FinCEN filed a Notice of Proposed Rulemaking under section
311 of the USA PATRIOT Act. This provision grants the Treasury
Department the authority to require US "financial
institutions" and financial agencies to take certain
"special measures" against one or more financial
institutions in a country that is so identified as a money
laundering concern. The special measures proposed vis-ŕ-vis
Iran concern "correspondent accounts" – i.e.,
an account that one financial institution maintains at another
financial institution. The special measures concerning
correspondent accounts include the following:

Conducting additional due diligence to ensure no account at a
non-Iranian financial institution is being used indirectly to
provide services to an Iranian banking institution; and

When the US financial institution knows, or has reason to know,
that an account holder provides services to Iranian financial
institutions notifying that account holder that it may not provide
an Iranian financial institution access to the account
holder's US accounts.

These restrictions could serve as a means to terminate US
correspondent banking relationships with third country financial
institutions that may be conducting financial transactions and
engaging in other business relationships with Iranian banks and
credit institutions.

Additional Designations by OFAC

In addition to the above sanctions, the US Department of the
Treasury, Office of Foreign Assets Control ("OFAC") has
added additional Iranian entities to the
Specially Designated Nationals ("SDN") List for their
alleged role in nuclear proliferation and other activities.
Effectively, US persons may not conduct transactions or business
dealings with the new SDNs, and the SDNs' property and property
interests held by US persons or in the US are now
blocked.

UK and Canada Action Against Iran

The expanded US sanctions are undertaken alongside similar
sanctions imposed by the United Kingdom and Canada on November 21,
2011. Specifically:

UK: The UK Government imposed an order under the Counter-Terrorism Act of 2008
requiring UK credit and financial institutions to cease all
business with financial institutions incorporated in Iran, and
their branches and subsidiaries, wherever located, as well as the
Central Bank of Iran (referred to as "designated persons"
in the order). This measure supplements, and in some respects
expands upon, Iran sanctions implemented by the European Council
(see EC Regulation 961/2010), which the UK has
implemented. Effectively, these new, unilateral UK measures
prohibit UK financial institutions (referred to as "relevant
persons") from entering into, or continuing, transactions or
business relationships with designated persons, unless licensed by
HM Treasury. This may include making a payment, processing a
payment, transmission of funds, exchange of financial or credit
documents, acting under a contract with or pursuant to an
obligation owed, or taking any other business relationship act,
unless licensed by the UK Government. The order covers existing
transactions entered into prior to the Direction becoming effective
on 21 November 2011, which means that business relationships must
cease, unless licensed. The UK Government has published (6)
six general licenses, but if none are available, applications for
specific licenses may be submitted and approved, depending on the
circumstances.

Canada: The Canadian Government, pursuant to
subsections 4(1) to (3) of the Special Economic Measures Act,
amended and expanded the Special Economic Measures (Iran)
Regulations. The updated sanctions prohibit the provision or
acquisition of most financial services to, from, or for the benefit
of Iran, or at the direction or order of Iran or any person in
Iran. The new sanctions also, with certain exceptions, expand
Canada's previously-existing petroleum-based sanctions to
prohibit the export, sale, supply or shipping of any goods
used in the petrochemical, oil, or natural gas industry. The
amended sanctions also expand the Canadian Schedule 1 list of
persons (and family members and associated of such persons) who
contribute to Iran's nuclear activities and weapons of mass
destruction, as well as officials in the Islamic Revolutionary
Guard Corps, and also expand the Schedule 2 list of goods
prohibited for export to Iran.

The above sanctions are the most expansive and thorough to date.
All three countries highlighted the recent International Atomic
Energy Agency November report (setting out the Agency's
concern about the potential military dimensions to Iran's
nuclear program) and the Financial Action Task Force October report (noting Iran's failure to
combat risk of terrorist financing) as a basis for the new
sanctions. They also emphasized the possibility of additional
sanctions on the Iranian financial sector. Taken together, these
sanctions and announcements further solidify the commitment of the
US, UK, and Canada to restrict Iran's financial and energy
sectors, and thereby further isolate Iran from involvement in
international commerce.

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